How to improve banks profitability through the management of NPAs (non-performing assets)
Non-performing assets (NPAs) are among the leading causes of declining profitability in banks. Therefore, effective management of NPAs is essential in keeping a bank or other lending institution operational. Since the management of existing NPAs can be difficult and may often lead to debt collection measures and legal action, banks are better off mitigating their cumulative effects by using tools designed to prevent the future acquisition of more NPAs.
What is an NPA?
A non-performing asset is a loan or a borrower’s account that has been classified by a bank as a sub-standard asset, or one that has either been written off as a loss, or is likely to be.
NPA management in banks
NPAs are a challenge for all banks. They have an adverse effect on an institution’s credibility and credit rating. Carefully managing these assets should be a priority for any bank. While there is no immediate and final cure for NPAs and their effects, there are several ways of mitigating them. These could include:
- The proactive detection of potential loan defaults, enabling banks to monitor and recover loans more effectively.
- More effective tools for monitoring, follow-ups and escalations of NPAs
- Through the monitoring and follow-up mentioned above, the curtailment of NPA, while simultaneously increasing the lending capacity and liquidity of the bank to offset the effects of troublesome assets.
These tools and solutions are mostly designed to provide predictive analysis so as to guard against future NPAs. Data from various sources are collected and analyzed to support lending decisions based on repayment capacity and other factors. Accordingly, the management of NPAs is heavily technology-based, relying on advanced analytical tools.